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2.2 PRICE ELASTICITY OF DEMAND 45

The demand curve D 3 in Figure 2.15 shows what happens in the extreme as
demand becomes increasingly elastic. The demand curve D illustrates perfectly elas-
3
tic demand (i.e., , q). Along the perfectly elastic demand curve D , any posi-
3
Q P
tive quantity can be sold at the price P, so the demand curve is a horizontal line. The
opposite of perfectly elastic demand is perfectly inelastic demand (i.e., , 0), when
Q P
the quantity demanded is completely insensitive to price. 8
The price elasticity of demand can be an extremely useful piece of information for
business firms, nonprofit institutions, and other organizations that are deciding how
to price their products or services. It is also an important determinant of the structure
and nature of competition within particular industries. Finally, the price elasticity of
demand is important in determining the effect of various kinds of governmental
interventions, such as price ceilings, tariffs, and import quotas. In later chapters, we
explore the analysis of these questions using price elasticities of demand.

LEARNING-BY-DOING EXERCISE 2.5
S
D
E
Price Elasticity of Demand
Suppose price is initially $5.00, and the Thus, over the range of prices between $5.00 and $5.75,
corresponding quantity demanded is 1,000 units. quantity demanded falls at a rate of 1.33 percent for
Suppose, too, that if the price rises to $5.75, the quan- every 1 percent increase in price. Because the price
tity demanded will fall to 800 units. elasticity of demand is between 1 and q, demand is
elastic over this price range (i.e., quantity demanded is
Problem What is the price elasticity of demand over relatively sensitive to price).
this region of the demand curve? Is demand elastic or
inelastic? Similar Problem: 2.4

Solution In this case, P 5.75 5 $0.75, and
Q 800 1000 200, so

¢Q P 200 $5
Q, P 1.33
¢P Q $0.75 1000

ELASTICITIES ALONG SPECIFIC DEMAND CURVES
Linear Demand Curves
A commonly used form of the demand curve is the linear demand curve, represented linear demand curve
by the equation Q a b P, where a and b are positive constants. In this equation, the A demand curve in the
constant a embodies the effects of all the factors (e.g., income, prices of other goods) form Q a bP.
other than price that affect demand for the good. The coefficient b reflects how the
price of the good affects the quantity demanded. 9
Any downward-sloping demand curve has a corresponding inverse demand inverse demand curve
curve that expresses price as a function of quantity. We can find the inverse demand An equation for the demand
curve that expresses price
as a function of quantity.
8 In Problem 2.12 at the end of the chapter, you will be asked to sketch the graph of a demand curve
that is perfectly inelastic.
9 However, as you will see soon, the term b is not the price elasticity of demand.